Johannesburg - Reacting to data released on Monday showing a timid recovery in business confidence, economists said optimism will only improve once households up their consumption levels.

Sacci's business confidence index - a composite weighted index of 13 sub-indices - dipped 2.3 index points to 81.2 in January 2010 from the month before. Compared to January 2009, the index is 1.2 index points lower.

"The tentative recovery of business confidence in South Africa is cause for concern, especially among the peer group of emerging market economies," said Sacci.

It said strong final domestic demand, a turn in the inventory cycle and the recovery of international trade are driving a robust recovery in many emerging and developing economies, but have yet to support a rebound in the South African economy. "The consequences of the recession may still pervade the domestic economy and contribute to the reticence in the business environment as well as in business confidence."

Standard Bank economist Danelee van Dyk said the BCI reflects an economy that is slowly recovering from the global recession, adding the recovery is still uneven and largely propelled by stock accumulation worldwide.

"The largest potential driver of economic growth is essentially household expenditure," Van Dyk said. "Until household demand has recovered, there will be little scope for a wholesale improvement in business confidence.

"This is a necessary condition for an improvement in the health of corporates' balance sheets. We anticipate therefore that the improvement in business confidence indicators will be slow."

Brait's Colen Garrow concurred: "The SA recovery is fragile. Jobless economic recoveries are rare phenomena. Until the economy starts creating jobs, consumption expenditure will be on the back foot."

Brait said any recovery will also depend on banks being less risk averse, adding more liquidity to the economy.

- Fin24.com